2024 (8) TMI 828 - HC - Income Tax

Eligibility of advantage of the Vivad Se Vishwas I-Relief for MSMEs Scheme VSV Scheme - Petitioner was registered as a Medium Enterprise under the MSME Act and obtained an Udyam Registration Certificate - Eligibility conditions for applying under the VSV Scheme were modified - Petitioner was upgraded/re-classified as not an MSME -scope of Clause 8 (5) as substituted by Notification dated 18th October 2022 Whether the Petitioner is entitled to take the benefit of the VSV Scheme in February 2024 when it was re-classified as not an MSME w.e.f. 9th May 2023 ? - HELD THAT - Clause 8 (5), as substituted by Notification dated 18th October 2022, creates a legal fiction of treating a Micro or Small or a Medium Enterprise as such, for a period of three years, from an upward change/reclassification in its status, notwithstanding the fact that its status may have changed due to its upward change/re-classification. This, of course, is for the limited purpose of availing of all non-tax benefits - For example, if a Small Enterprise becomes a Medium Enterprise by virtue of its upward re-classification , for availing of all non-tax benefits, it will continue to be treated as a Small Enterprise for a period of three years from such upward change/re-classification. Similarly, if a Medium Enterprise is classified as not an MSME by virtue of its upward re-classification, for availing of all non-tax benefits, it will continue to be treated as a Medium Enterprise for a period of three years from such upward change/re-classification Even though the Petitioner was re-classified as not an MSME by virtue of upward reclassification w.e.f. 9th May 2023, for a period of three years from 9th May 2023, it was entitled to avail of all non-tax benefits available to a Medium Enterprise. Since the VSV Scheme is a non-tax benefit applicable even to a Medium Enterprise, in our view, the Petitioner was entitled to make a claim under the VSV Scheme. We are of the view that the emails dated 12th March 2024 and 13th March 2024 have wrongly held that the Petitioner was not entitled to make a claim under the VSV Scheme. WP allowed.

Issues Involved:
1. Eligibility of the Petitioner to avail benefits under the "Vivad Se Vishwas I-Relief for MSMEs Scheme" (VSV Scheme).
2. Interpretation of Clause 8(5) of the Notification dated 26th June 2020, as substituted by the Notification dated 18th October 2022.
3. Contradictory stands taken by the Ministry of Finance and the Ministry of Micro, Small and Medium Enterprises (MSME).

Issue-wise Detailed Analysis:

1. Eligibility of the Petitioner to Avail Benefits under the VSV Scheme:

The central issue in the writ petition was whether the Petitioner, who was re-classified as "not an MSME" as of 9th May 2023, was eligible to benefit from the VSV Scheme. The VSV Scheme, established by the Finance Ministry, aimed to refund 95% of the liquidated damages deducted under contracts with the Government/PSUs, provided the contractor was registered as a Medium, Small, or Micro Enterprise (MSME) on the date of the claim.

The Petitioner had been registered as a Medium Enterprise on 10th May 2021 but was re-classified as "not an MSME" on 9th May 2023. Despite this re-classification, the Petitioner argued that they should be considered eligible for the VSV Scheme based on the provisions of Clause 8(5) of the Notification dated 26th June 2020, as substituted by the Notification dated 18th October 2022. This clause allowed enterprises to continue availing non-tax benefits of their previous classification for three years following an upward re-classification.

2. Interpretation of Clause 8(5) of the Notification:

Clause 8(5) of the Notification dated 26th June 2020, as substituted by the Notification dated 18th October 2022, stated that in case of an upward change in terms of investment or turnover and consequent re-classification, an enterprise would continue to avail all non-tax benefits of the category it was in before the re-classification, for a period of three years. The Petitioner argued that this clause created a legal fiction, allowing them to be treated as a Medium Enterprise for non-tax benefits, including the VSV Scheme, for three years from the date of re-classification.

The Ministry of Finance, however, contended that the VSV Scheme required the enterprise to be registered as an MSME on the date of the claim. Since the Petitioner was re-classified as "not an MSME" on 9th May 2023, they were deemed ineligible for the VSV Scheme. The Ministry argued that Clause 8(5) did not apply to situations where an enterprise ceased to be an MSME due to upward re-classification.

3. Contradictory Stands by the Ministries:

The Ministry of Finance opposed the Petition, maintaining that the Petitioner was not eligible for the VSV Scheme as they were not an MSME on the date of the claim. Conversely, the Ministry of MSME, in its Affidavit in Reply dated 8th August 2024, supported the Petitioner's stance, asserting that the Petitioner should continue to avail non-tax benefits of the "Medium" category until 8th May 2026.

Analysis and Findings:

The Court examined the eligibility criteria under the VSV Scheme and the relevant notifications. It found that Clause 8(5) of the Notification dated 26th June 2020, as substituted by the Notification dated 18th October 2022, explicitly allowed an enterprise to continue availing non-tax benefits of its previous classification for three years following an upward re-classification. The Court noted that this clause applied to upward changes, including from Medium Enterprise to "not an MSME," and created a legal fiction for non-tax benefits.

The Court referred to the Hon'ble Supreme Court's decision in Voltas Limited vs. Union of India, which emphasized that statutory fictions must be given full effect for the purposes they serve. Therefore, the Court concluded that the Petitioner was entitled to be treated as a Medium Enterprise for non-tax benefits, including the VSV Scheme, for three years from 9th May 2023.

Conclusion:

The Court held that the Petitioner was wrongfully denied the benefit of the VSV Scheme. The emails dated 12th March 2024 and 13th March 2024 were quashed, and the Respondents were directed to entertain the Petitioner's claim under the VSV Scheme. The Writ Petition was allowed in terms of prayer clauses (iii-a) and (iii-b), with no order as to costs. The Court clarified that it did not adjudicate the merits of the Petitioner's claim under the VSV Scheme, which must be considered by the Respondents as per the scheme's provisions and in accordance with the law.

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